When “Easy Money” Ends: The Beginning of the End for Quantitative Easing

Richard Cooper and Richard Dobbs examine how the end 

Project Syndicate

Jan 28, 2014 

By Richard Cooper and Richard Dobbs 

BildThe departure of US Federal Reserve Board Chairman Ben Bernanke has fueled speculation about when and how the Fed and other central banks will wind down their mammoth purchases of long-term assets, also known as quantitative easing (QE). Observers seize upon every new piece of economic data to forecast QE’s continuation or an acceleration of its decline. But more attention needs to be paid to the impact of either outcome on different economic players.

CommentsView/Create comment on this paragraphThere is no doubting the scale of the QE programs. Since the start of the financial crisis, the Fed, the European Central Bank, the Bank of England, and the Bank of Japan have used QE to inject more than $4 trillion of additional liquidity into their economies. When these programs end, governments, some emerging markets, and some corporations could be vulnerable. They need to prepare.

CommentsView/Create comment on this paragraphResearch by the McKinsey Global Institute suggests that lower interest rates saved the US and European governments nearly $1.6 trillion from 2007 to 2012. This windfall allowed higher government spending and less austerity. If interest rates were to return to 2007 levels, interest payments on government debt could rise by 20%, other things being equal.

CommentsView/Create comment on this paragraphGovernments in the US and the eurozone are particularly vulnerable in the short term, because the average maturity of sovereign debt is only 5.4 years and roughly six years, respectively. The United Kingdom is in better shape, with an average maturity of 14.6 years. As interest rates rise, governments will need to determine whether higher tax revenue or stricter austerity measures will be required to offset the increase in debt-service costs.

CommentsView/Create comment on this paragraphLikewise, US and European non-financial corporations saved $710 billion from lower debt-service payments, with ultra-low interest rates thus boosting profits by about 5% in the US and the UK, and by 3% in the eurozone. This source of profit growth will disappear as interest rates rise, and some firms will need to reconsider business models – for example, private equity – that rely on cheap capital.

CommentsView/Create comment on this paragraphEmerging economies have also benefited from access to cheap capital. Foreign investors’ purchases of emerging-market sovereign and corporate bonds almost tripled from 2009 to 2012, reaching $264 billion. Some of this investment has been initially funded by borrowing in developed countries. As QE programs end, emerging-market countries could see an outflow of capital.

CommentsView/Create comment on this paragraphBy contrast, households in the US and Europe lost $630 billion in net interest income as a result of QE. This hurt older households that have significant interest-bearing assets, while benefiting younger households that are net borrowers.

CommentsView/Create comment on this paragraphAlthough households in many advanced economies have reduced their debt burdens since the financial crisis began, total household debt in the US, the UK, and most eurozone countries is still higher as a percentage of GDP (and in absolute terms) than it was in 2000. Many households still need to reduce their debt further and will be hit with higher interest rates as they attempt to do so.

CommentsView/Create comment on this paragraphSome companies, too, have been affected by QE and will need to take appropriate steps if such policies are maintained. Many life-insurance companies and banks are taking a considerable hit, because of low interest rates. The longer QE continues, the more vulnerable they will be. The situation is particularly difficult in some European countries. Insurers that offer customers guaranteed-rate products are finding that government-bond yields are below the rates being paid to customers. Several more years of ultra-low interest rates would make many of these companies vulnerable. Similarly, eurozone banks lost a total of $230 billion in net interest income from 2007 to 2012. If QE continues, many of them will have to find new ways to generate returns or face significant restructuring.

CommentsView/Create comment on this paragraphWe could also witness the return of asset-price bubbles in some sectors, especially real estate, if QE continues. The International Monetary Fund noted in 2013 that there were already “signs of overheating in real-estate markets” in Europe, Canada, and some emerging-market economies. In the UK, the Bank of England has announced that in February it will end its mortgage Funding for Lending Scheme, which allowed lenders to borrow at ultra-low rates in exchange for providing loans.

CommentsView/Create comment on this paragraphOf course, QE and ultra-low interest rates served a purpose. If central banks had not acted decisively to inject liquidity into their economies, the world could have faced a much worse outcome. Economic activity and business profits would have been lower, and government deficits would have been higher. When monetary support is finally withdrawn, this will be an indicator of the economic recovery’s ability to withstand higher interest rates.

CommentsView/Create comment on this paragraphNevertheless, all players need to understand how the end of QE will affect them. After more than five years, QE has arguably entrenched expectations for continued low or even negative real interest rates – acting more like addictive painkillers than powerful antibiotics, as one commentator has put it. Governments, companies, investors, and individuals all need to shake off complacency and take a more disciplined approach to borrowing and lending to prepare for the end – or continuation – of QE.

Richard Dobbs is a director of the McKinsey Global Institute.


World risks era of slow growth, high unemployment.

OECD warns of new era of low growth | Capital Business

Feb 21, 2014


BildThe OECD on Friday warned declining global productivity will usher in a new and extended era of low growth unless there are major structural reforms.

Its new “Going for Growth” report identifies infrastructure shortages and slowing trade activity as key problems — issues that will be in focus at the G20 meeting of finance ministers and central bank governors in Sydney this weekend.

“The widespread deceleration in productivity since the (global financial) crisis could presage the beginning of a new low-growth era,” the Organisation for Economic Cooperation and Development said.

“The global economy’s momentum remains sluggish, heightening concerns that there has been a structural downshift in growth rates compared with pre crisis levels.

“These concerns, already prevalent among advanced OECD countries for some time, now encompass emerging-market economies and are fuelled also by high unemployment and falling labour force participation in many countries.”

OECD chief Angel Gurria said the report came at a time of transition for the global economy, when “we see the recovery strengthening in advanced economies, albeit at different speeds, while growth in emerging economies is slowing”.

“Normally it’s the other way around,” Gurria told reporters in Sydney, noting that key drivers of productivity growth such as credit, investment and trade, had been “very very sluggish, in some cases unusually weak since the crisis”.

Growth was muted, unemployment and economic inequality was rising and the OECD chief said there had been a “big drop in the confidence, in the trust in all the institutions we’ve built up over 50 to 100 years”.

With traditional stimulatory instruments such as fiscal and monetary policy nearing or at their limit, Gurria said “ambitious” structural reform agendas needed to be pursued “with determination by all G20 countries.”

“Stronger demand is indeed fundamental but by no means sufficient to avoid the low-growth trap,” he said.

Gurria said the OECD report could be seen as a glass half-full or half-empty assessment.

On the positive side, he said the speed of reform remained “on average well above the pace observed before the crisis.”

Detracting from this, however, momentum had slowed “visibly” in the past two years and reforms were “fragmented, piecemeal, incremental and unlikely to fully address the underlying challenges.”

The report calls for investment in skills to boost labour force participation, and a fresh approach to encourage private investment in infrastructure to help boost growth.

– Global trade slowdown –

“One worrying development is the marked slowdown in global trade activity relative to world production,” the report said.

“And trade-related concerns are magnified by subdued investment in new plant, machinery and equipment as well as in less tangible assets such as research and development or new business processes and workforce training, which are needed to make the most of new technologies.”

The OECD said that business investment rates in most advanced economies were below what would be needed to sustain higher-trend growth rates.

“In several emerging-market economies — notably Brazil, India and Indonesia — infrastructure investment is not sufficient to support high rates of industrialisation and urbanisation, hampering potential growth.”

The G20 has sessions on the global economy and growth strategies, both of which have been prioritised by summit chair Australia with Treasurer Joe Hockey.

OECD data released Thursday showed growth in advanced economies slowed down slightly in 2013 to 1.3 percent from 1.5 percent in 2012.

The highest 12-month rate was turned in by Britain with 2.8 percent, followed by Japan and the United States with 2.7 percent.

“China has every right now to demand the US address its structural debt problems and ensure the safety of China’s dollar assets.”

As stimulus begins wind-down, U.S. still holding its own… debt


June 19, 2013  

The Federal Reserve has been looking at the progress of the US economic recovery and begins to end stimulus programs if progress remains steady.  As of June 2013, the federal government’s outstanding debt surpassed $16 trillion. U.S. government agencies, including giant trust funds of the Social Security and Medicare systems, and the independent Federal Reserve System account for 41 percent of the federal debt, more than $2 of every $5. China is the biggest foreign creditor ($1.144 trillion), followed by Japan ($1.076 trillion).

Top academic urges global currency – Africa – China Daily

China Daily Africa  


By Fu Jing and Chen Jia   

A supranational currency is needed to replace the US dollar to prevent global financial crises from recurring, according to a former World Bank chief economist.

„I think the dominance of the greenback is the root cause of global financial and economic crises,“ Justin Yifu Lin told a breakfast seminar at the Brussels think tank Bruegel on Jan 27.

„The solution to this is to replace the national currency with a global currency,“ said Lin, now a professor at Peking University and a leading adviser to the Chinese government.

He said that expanding the basket of reserve currencies – the US dollar, the yen, euro and sterling – will not address the consequences of a financial crisis.

Even internationalization of the Chinese currency is not the answer to rooting out the causes of such a crisis, he said.

Lin also said he is not optimistic about the outlook for the global economy, although there are signs that economies in the United States and Europe have started to pick up.

To boost the global economy, he proposed the launch of a „global infrastructure initiative“ to remove development bottlenecks in poor and developing countries, saying this can also offer tremendous opportunities for advanced economies.

Lin urged the international community, especially the US and European Union, to play a leading role in currency and infrastructure initiatives.

„China can only play a supporting role in realizing the plans. The urgent thing is for the US and Europe to endorse these plans,“ he said. „And I think the G20 is an ideal platform to discuss the ideas,“ he added, referring to the 20 major economies.

David Bloom, global head of FX research at HSBC, says US monetary policy change „will bring fluctuations for emerging countries‘ currencies and lead to financial instability“.

Chen Wenling, chief economist at the China Center for International Economic Exchanges, a government think tank, says: „A supranational currency may be a new direction for development of the global financial system. It also requires different countries to cooperate in coordinating macroeconomic policies.“

Both Bloom and Chen say China needs to play a more important role in global financial governance.

But Bloom says it is difficult for international financial organizations to reach a consistent conclusion on how to improve the foreign exchange system.

He says the renminbi is predicted to be stronger this year, even against an appreciating US dollar, and internationalization of China’s currency will accelerate when the government decides to further open the capital market.

Michal Krol, a researcher at the Brussels-based European Center for International Political Economy, does not agree that US dollar hegemony is the root cause of the global economic crisis.

Instead, he says the appearance of other currencies, such as the euro, the yuan and the yen, has created a situation where an adjustment mechanism needs to be in place.

„I don’t think that the largest economies and their currencies are at this moment ready for the introduction of a supranational currency,“ Krol says.

„Neither the EU nor China have financial markets and monetary systems yet that are sound, solid, predictable and well functioning to be the cornerstone for a global system.

„But, indeed, it is time to formulate the fundamentals for global monetary governance.“

Pierre Defraigne, executive director of the Madariaga – College of Europe Foundation, says of Lin’s infrastructure proposal: „It is excellent, but the problem is how to implement these plans to link those countries that need such infrastructural construction and those with enough foreign reserves, by using an effective global mechanism.“  


The U.S. and China are deeply cooperative and deeply competitive.

RealClearWorld – Was 2013 the Year We Lost China?

Dec 23, 2013 

By Noah Feldman

BildHaving spent two days getting to know each other in Sunnylands, California, in June, Presidents Xi Jinping of China and Barack Obama of the U.S. sent each other Christmas gifts this year. Obama sent a B-52 bomber through airspace that China claims as its own; Xi then sent a ship from his new carrier group to cut a dangerous 200 yards in front of an American cruiser. Cool war heating up much?

The U.S. and China have the most important bilateral relationship in the world. The rising global superpower and the status quo superpower are deeply cooperative and deeply competitive — at the same time. Hostile military gestures are part of that relationship, but so was the warm Sunnylands summit, to say nothing of separate trade negotiations each side is pursuing with the same Asian countries. In 2013, the year Xi called for “a new type of great-power relationship” between the countries, those contradictions deepened. The dangers of nationalism on both sides can be increasingly sensed. Hillary Clinton and other aspiring Democratic presidential candidates had better pay attention — you can be sure that Bobby Jindal and other smart, aspiring Republican candidates are.

The pre-Christmas exchange of near hostilities is more important than has generally been realized in the U.S. news media. The nominal trigger was a pile of uninhabited rocks in the East China Sea, known in Japanese as the Senkaku Islands and in Chinese as the Diaoyu. China claims the islands, which are 200 miles from the Chinese coast and 120 miles from Taiwan. Japan, also 200 miles away, not only claims the islands but also controls them. The traditional position of the U.S. has been that it recognizes Japan’s de facto control without expressly taking a position on ownership.

One reason the islands matter is that they form part of a chain running from Japan to Taiwan to Vietnam, a line loosely parallel to China’s eastern coast, and thus relevant to its defense posture. But they are much more important for what they signal about China’s increasingly aggressive rise as a geopolitical power following its extraordinary economic growth.

China and Japan have been exchanging escalatory gestures around the islands since the summer of 2012. But this November, China officially claimed to establish an “air-defense identification zone” in an area of the East China Sea that includes the islands, meaning that the crew of any aircraft passing through must, according to the Chinese, say who they are, show national markings, and remain in two-way communication with Chinese forces. This was a new level of asserted control, and it could have been intended only to provoke confrontation with Japan, which had regularly sent American-made F-15 fighters over the islands.

In symbolic response, the U.S. flew (unarmed) B-52 bombers through the air-defense identification zone, without providing any identification or communicating with China. The choice of the B-52s was itself symbolic. Fighter jets might have been construed as more up to date, but the hulking, stalwart B-52, in use since the 1950s, harkened back to the era of Cold War supremacy.

A few days later, Xi replied. An American missile-armed cruiser, the USS Cowpens, was in the South China Sea observing the first Chinese aircraft carrier, the Liaoning (it’s actually a repurposed former Soviet ship that is useful mostly for training and national pride). A craft from the Chinese battle group cut straight across the path of Cowpens, as close as 200 yards away. For ships that size, this certainly counted as a near miss. American officials called the maneuver “particularly aggressive.” Xi’s message to Obama was, pretty clearly, “you mess with us, we will mess right back with you.”

Signal and counter-signal are important reminders that economic globalization has not allowed us to magically transcend the possibilities of violent confrontation. Xi is in the process of consolidating power to a degree not seen by any Chinese leader in 20 years, cracking down on corruption within the Chinese Communist Party and on political dissent outside it. He has no intention of even gradual democratization. An important part of his consolidation strategy rests with the People’s Liberation Army, which respects him far more than it did his immediate predecessors. Xi needs to keep his senior officers happy.

What’s more, Xi’s ideological program rests on a potentially nationalist strategy for motivating supporters in what promises to be an era of slower economic growth. His slogan is “the Chinese dream,” and that dream goes beyond the individual to the nation as a whole, which aspires to be recognized globally as having international status on par with its economic importance.

Meanwhile, both American political parties found it convenient to be moderate toward China during the years of its rise, when the U.S. was preoccupied in Iraq and Afghanistan and saddled with the aftermath of the 2008 crisis. How long can that last? “China’s peaceful rise” was a good slogan, but “America’s peaceful decline” doesn’t have much of a ring to it. Nationalism in the U.S. may be a valuable political tool for Republican candidates who want to show that the Obama years involved foreign policy failures. That strategy will be especially appealing if Hillary Clinton is the Democratic candidate in 2016.

Noah Feldman, a law professor at Harvard University and the author of „œCool War: The Future of Global Competition,“ is a Bloomberg View columnist.


The tectonic plates of power are shifting in the Pacific Ocean.

As the US wanesChina gains | The Australian


AUGUST 05, 2010 


BildBENEATH the radar, almost by stealth, the tectonic plates of power are shifting in the Pacific Ocean. A resurgent China is baring its teeth at the once indomitable US Pacific fleet. The certainty of US hegemony over this vast ocean, which Australians have taken for granted since World War II, is being challenged.

But this steady transformation of our security outlook has failed to capture public attention in Australia precisely because it has been so steady and does not lend itself to an easy headline in a world of 24-hour news cycles.

It is being driven by twin factors: the rise of China as a Pacific power and the decline of imperial America.

The first is undeniable. China is working feverishly to create a navy and a land-based anti-ship missile system that will prevent the US 7th Fleet from dominating its territorial waters, including Taiwan.

The second assumption is more contentious. But there is a growing view among some of the world’s foremost thinkers that the American empire is now in inexorable decline and that the sun will soon set on the US era of hegemony in the Asia-Pacific.

This Pacific retreat, they argue, will not be voluntary but will be forced on Washington by financial pressures as the world superpower teeters under the burden of its $US1.47 trillion deficit, now equal to 10 per cent of GDP.

Last week, Harvard economist Niall Ferguson delivered a stark warning about the imperial decline that affects great powers when they are no longer able to manage their economies.

Giving the John Bonython Lecture at the Centre for Independent Studies in Sydney, Ferguson warned that the US economy is now so mired in debt that Washington has little choice but to try to save itself by slashing defence spending.

„The US is on a completely unsustainable fiscal course with no apparent political means of self-correcting,“ he said.

„Military expenditure is the item most likely to be squeezed to compensate because, unlike mandatory entitlements [such as social security], defence spending is discretionary.“

He points out that the US Congressional Budget Office’s latest projections say debt could rise above 90 per cent of GDP by 2020 and to an astonishing 344 per cent by 2050 — a figure that would see net interest payments become a crippling 85 per cent of revenue.

„What if the sudden waning in American power that I fear brings to an abrupt end the era of hegemony in the Asia-Pacific region? Are we ready for such a dramatic change in the global balance of power?“ he asks

While Ferguson’s warnings will be dismissed by some as alarmist, there is an underlying logic to many of his arguments.

For the first time since the 9/11 terrorist attacks of 2001, there is serious debate in the US about the size and cost of the armed forces.

A decade of rapid increases in military spending have spluttered to a halt, and with US combat forces withdrawing from Iraq and due to leave Afghanistan from 2014, the mood is ripe for cuts in military spending.

„We’re going to have to take a hard look at defence if we are going to be serious about deficit reduction,“ Erskine Bowles, co-chairman of the US Congress’s deficit-reduction commission, said last month.

Even Defence Secretary Robert Gates admits „the gusher [on military spending] has been turned off and will stay off for a good period of time“.

According to a report last month by Washington’s Centre for Strategic and International Studies, the legacy of the global financial crisis will be to stymie US defence spending in the long term relative to nations such as China, Russia and India.

„The 2008 financial crisis had a more detrimental impact on advanced economies like the US than on developing economies like China and India,“ according to the report.

It says China and Russia have increased defence spending at a faster rate than the US in the past decade and that this will continue because they have had a more robust economic recovery.

„Revenues will decrease for the US government as debt and entitlements will exponentially grow,“ it says. „Defence spending is set to decrease in real terms over the long term. As such, the Pentagon will have to grapple with dwindling resources [and] this may be a serious challenge.“

One of Australia’s leading defence analysts, Mark Thomson, agrees.

„The GFC has left US public finances in a parlous state,“ he says in a recent report for the Australian Strategic and Policy Institute.

„It is difficult to escape the conclusion that the scene is set for a large downward swing in US defence spending like those which occurred in 1953, 1970 and 1984.

„In the absence of a clear and present strategic imperative, the next decade will once again see a contraction of US military power — a contraction that is likely to accelerate in the decades that follow, given the long-term fiscal outlook.“

The good news for Australia is that even if US military spending declines and the Pacific fleet dwindles in size and potency, it will be many years before it is seriously challenged as the pre-eminent power in the region.

The US will this year spend more than $US700 billion on national defence, more than the next 34 highest spending countries in the world combined.

The US 7th fleet in the western Pacific has more than 50 warships, 350 aircraft and 60,000 marines at its disposal, including 18 permanently forward-deployed warships operating from Japan and Guam.

The fleet holds a clear military superiority over Chinese naval forces today and is likely to do so for years to come, even allowing for a steady decline in US defence spending that will eventually affect its military presence in the region.

But what troubles some Americans is that China’s naval build-up poses a more immediate risk to US naval operations close to the Chinese coast, raising doubts about the ability of US forces to defend Taiwan.

As the chairman of the US Joint Chiefs of Staff, Admiral Mike Mullen, said last month, China is making a fundamental „strategic shift, where they are moving from a focus on their ground forces to focus on their navy, and their maritime forces and their air force“.

China is pumping many billions of dollars into new warships and submarines with the aim of denying the US Navy the ability to rule supreme in East Asian waters.

It has also displayed a willingness to scrap with US forces in the region, including the harassment and obstruction of the US naval survey ship Impeccable by five Chinese vessels and a maritime aircraft in the South China Sea in March last year.

Several months later a Chinese submarine hit an underwater sonar array being towed by the destroyer USS John McCain near Subic Bay in The Philippines.

„China’s military ambitions and behaviour, even though focused relatively close at home, indicate nothing less than a bid for geopolitical pre-eminence in East Asia,“ says maritime security expert Chris Rahman in a recent ASPI report on China’s maritime agenda.

„Some have argued that an essentially stable geostrategic balance exists in East Asia, with China dominant on land and the US dominant at sea. „However, that argument misunderstands the challenge that China’s seaward expansion poses to the US system of regional security.

„It is the [People’s Liberation Army’s] growing ability to deny access to East Asian seas in a crisis or conflict, and so to disrupt the security system led by US Pacific command, that most threatens regional order and harmony at sea.“

One of the US’s leading strategic thinkers, John Mearsheimer from the University of Chicago, said in Australia this week that China will seek to push the US out of Asia.

„I think that China cannot rise peacefully and that this is largely predetermined,“ he says.

Of greatest concern for the US and the West is the development by China of an anti-ship missile with a range of nearly 900 miles (1450km), specifically designed to defeat US carrier strike groups.

Gates has said bluntly China’s „investments in anti-ship weapons and ballistic missiles could threaten America’s primary way to project power and help allies in the Pacific, particularly our forward bases and strike carrier groups“.

China’s ambitions in the Pacific are, at present, limited to denying US forces the ability to operate from forward bases such as Okinawa and Guam, as well as sowing doubts in the minds of Americans about the safety of US carrier groups close to the Chinese mainland.

Some believe the US military campaigns in Iraq and Afghanistan have come at the cost of other defence programs that would have been relevant to the Chinese threat, such as the decision to cancel the F-22 fighter program — a plane that was considered uniquely capable of penetrating China’s increasingly sophisticated air defence systems.

The Obama administration is taking China’s naval build-up in the region seriously and has recently moved to shore up its alliances in East Asia.

The US last month announced it would resume relations with Indonesia’s controversial special forces, Kopassus, in what The Washington Post described as „the most significant move yet by the United States to strengthen ties in East Asia as a hedge against China’s rise.“

The Obama administration has also taken recent steps to strengthen its ties with traditional allies such as South Korea and Japan, as well as Malaysia.

Alan Dupont, director of the Centre for International Security Studies at the University of Sydney, says America’s overtures have been received well in a region that is also nervously eyeing China’s naval expansion.

„In effect, China now faces the prospect of a revitalised and extended US alliance structure in Asia, which includes a second tier of de facto Asian partners, which worries about China’s rise as much as the US,“ Dupont says.

„A problem with this strategy is that the US is not dealing from a position of strength. Suffering from imperial overstretch and unprecedented peacetime fiscal deficits, which threaten to erode US military capabilities and foreign policy clout, this hardly seems the time for Asian states to put their faith in Uncle Sam.“

For a country such as Australia, which would rely heavily on the US Pacific fleet to protect it against a belligerent China, the prophecies of experts such as Ferguson are disturbing. Ferguson claims Australians have not thought about such big-picture trends as the possible decline of the US in the Pacific.

Regional security has not been discussed by either Prime Minister Julia Gillard or Opposition Leader Tony Abbott in this election campaign.

But if these prophecies come true and American power in the Pacific begins to wane, Australia will be unable to ignore the grave implications for its security.


The rise of China’s military and its capabilities

How China Would Fight the US (And Win) | The Diplomat

The Diplomat

October 01, 2013

by Harry Kazianis   

An interesting article in the Want China Times considers the rise of China’s military and its capabilities — now and in the future. The piece notes: “While the People’s Liberation Army continues to acquire more advanced weapon systems, it will still take China at least 30 years to compete with the United States and build the world’s most powerful military force…”

My own opinion: We would need to break this down in terms of looking at the various branches of China’s military across different domains, but who cares! Beijing certainly doesn’t.

OK, some explanation is needed for such a bold assertion.

Modern militaries are designed with certain objectives in mind. While Beijing is clearly focused on a possible challenge by U.S. forces intervening in some sort of future conflict (yes, A2/AD comes into play), China’s armed forces are designed to win, according to most experts, “local wars under informationized conditions.”

Clearly, not every situation under this concept has Beijing’s security professionals worried about American intervention or some sort of plane to plane, ship to ship match-up between the two. And that is exactly how Beijing likes it — for the time being.

Simply put: China does not need to match America symmetrically, only to defend what it defines as its “core interests.” An asymmetric strategy suits Beijing’s aims just fine in this regard.

In looking at some of the domains Chinese forces operate in, not every single one assumes America as the main adversary.

For example, in discussing China’s land forces — in which the article actually references Dennis Blasko, one of the world’s best analysts on China’s land forces –  one needs to ask who Beijing would actually be fighting on land these days? Things in Central Asia look quite good for Beijing, with no pressing challenges to consider at the moment. Sino-Russian relations are quite chummy, and there is little to no danger of a fight between these two giants. In fact, China’s lack of concern regarding Russia has allowed it to pour resources into other areas of its armed forces. Beyond peacekeeping forces through the United Nations, China does not seem intent on deploying land forces overseas anytime soon, and clearly not against American forces. It would be a waste of resources to devote vast sums of money to land forces where there is no rival for China to be concerned about in the near-term. Clearly, Beijing is modernizing its land assets, but not at the speed of other areas where it faces much more robust challenges.

This brings us to China’s forces on the high seas — a domain where Beijing has devoted considerable time and energy. Looking at Beijing’s rivals in the South China Sea, if a conflict were to develop between China and pretty much every other major claimant (with the exception of Taiwan), Beijing would defeat its rivals quickly and with relative ease. One of China’s biggest irritants in the South China Sea, the Philippines, has very few maritime assets at its disposal. Its best vessels are ancient U.S. Coast Guard ships, hardly a match for Beijing’s latest destroyers or land-based missiles.

China’s dispute with Japan over the Senkaku/Diaoyu Islands is obviously very different. The Japanese Navy is one of Asia’s best. At the moment, I would give the edge to Japan’s Navy in a one to one matchup with China based on its level of skill, training and sophistication. However, considering the large amounts and growing accuracy of Beijing’s missile forces, and its new class of anti-ship ballistic missiles, nothing could be assumed once the bombs start falling. In time, however, considering Beijing’s growing military budget, focus on 5th generation fighters and increasing naval register, Japan will be hard pressed to hold onto its advantages.

And that brings us naturally to the showdown everyone loves talking about, the much discussed U.S.-China military comparison. While it makes sense for even the most accomplished scholar to try and make direct comparisons of the two nations’ armed forces, the important point is this: Beijing certainly doesn’t.

Chinese military planners have stated time and time again they have no plans to try and match U.S. forces ship for ship, or carrier for carrier. China’s military — at least for the moment — is much more focused on the area around the first island chain, while America’s defense planners are focused on projecting power globally — two very different missions.

This is why understanding China’s much discussed “counter-intervention” strategy or A2/AD is so important. China intends to make things as difficult for America in the event of a conflict as possible. Why bother developing multiple carrier battle groups that would cost billions to build and billions more to maintain? If China can use large amounts of cruise and ballistic missiles, modern conventional submarines, sea-mines and other less costly assets to keep U.S. forces far from areas of contention or do real damage in a fight, that would suit Beijing just fine.

Unfortunately, a simple comparison between militaries is not as easy as the headline writers would have us believe. The true test for a nation’s military is quite simple: can it achieve the goals its leadership lays out and the internal goals it sets for itself? Sadly, that does not lend itself to a sexy headline (although we’ll do our best…); however, this is the question we must ask of China’s military today and going forward.


Free trade and the loss of U.S. jobs

Free trade and the loss of US jobs – Washington Post

The Washington Post

Jan 14, 2014 

By Harold Meyerson

When President Obama delivers his State of the Union address this month, he will surely highlight the issue of growing economic inequality and argue for such remedies as raising the minimum wage. He may also put in a plug for the proposed Trans-Pacific Partnership (TPP) trade agreement his administration is negotiating with 11 Pacific Rim nations and forfast-track legislation that would limit congressional input in the accord to facilitate its ratification.

If he does both — bemoan rising inequality and promote yet another free-trade agreement — his speech will rate a chapter in the annals of self-negation.

By now, even the most ossified right-wing economists concede that globalization has played a major role in the loss of American manufacturing jobs and, more broadly, the stagnation of U.S. wages and incomes. Former Federal Reserve vice chairman Alan Blinder has calculated that 22 percent to 29 percent of all U.S. jobs could potentially be offshored. That’s a lot of jobs: 25 percent would translate to 36 million workers whose wages are in competition with those in largely lower-income nations. Of the 11 nations with which the United States is negotiating the TPP, nine have wage levelssignificantly lower than ours.

Trade agreements that promote the relocation of U.S. corporations’ factories to nations like China and Mexico have played a central role in the evisceration of American manufacturing and the decline in U.S. workers’ incomes. Two out of three displaced manufacturing workers who got new jobs between 2009 and 2012, the Bureau of Labor Statistics reports, experienced wage reductions — most of them greater than 20 percent.

But perhaps the most devastating argument against the kind of trade accords the United States has entered into over the past quarter-century has been that inadvertently made by those defenders of such agreements who have used the 20th anniversary of the North American Free Trade Agreement — it went into effect on Jan. 1, 1994 — to celebrate its achievements. I’ve read many commemorative editorials, columns and speeches in praise of NAFTA, and not one of them has so much as mentioned the agreement’s effect on U.S. employment, wages or trade balance. In October, former World Bank president Robert Zoellick, who was one of NAFTA’s architects in the administration of George H.W. Bush, delivered a lengthy, glowing assessment of NAFTA’s achievements that managed to avoid any of those topics. The champion of avoidance seems to be Commerce Secretary Penny Pritzker. At a San Diego conference in October, a public radio reporter asked her, “And where has NAFTA not lived up to some of the hopes and promises?” Pritzker replied: “I don’t think about where NAFTA hasn’t lived up.”

The one statistic in the deal’s defense that Pritzker cited in that interview is that the total volume of trade among the three NAFTA signatories now exceeds $1 trillion a year. What she failed to note, however, is that the U.S. trade deficit with Canada and Mexico has risen from $27 billion in 1993, the last pre-NAFTA year, to $181 billion in 2012.

By avoiding discussion of the consequences that trade deals with developing nations have on U.S. workers, not to mention our trade balance, defenders of free trade are indulging in the worst kind of imperviousness to facts. But when the case for free trade is coupled with the case for raising U.S. workers’ incomes, it enters a zone where real numbers, and real Americans’ lives, matter. In that zone, the argument for the kind of free-trade deal embodied by NAFTA, permanent normal trade relations with China and the Trans-Pacific Partnership completely blows up. Such deals increase the incomes of Americans investing abroad even as they diminish the incomes of Americans working at home. They worsen the very inequality against which the president rightly campaigns.

There are ways that a developed nation can trade with the developing world without gutting its own economy. Germany has been able to protect its workers not only through the advantage of having the euro as its currency, but also by requiring its corporations to give their employees a major say in their companies’ investment decisions and by embracing a form of capitalism in which shareholders don’t play a major role. Were the United States to adopt this form of stakeholder capitalism, then its trade accords wouldn’t necessarily come at the expense of its workers. Absent such reforms, however, trade deals will only negate our attempts to diminish inequality.


China promises sustainable growth.

China premier promises to advance economy reforms

Associated Press

Mar 4, 2014 


China’s government promised sweeping reforms Wednesday to promote sustainable growth in its slowing economy by opening state-dominated industries to private investment, making its banks more market-oriented and encouraging consumer spending.

In his first annual policy speech as China’s top economic official, Premier Li Keqiang said Beijing will encourage competition, ease exchange rate controls and improve access to credit for productive businesses.

Li’s pledges were in line with Communist Party plans issued in November that call for promoting market forces and domestic consumption to replace a model based on exports and investment that delivered three decades of explosive growth but has run out of steam.

„We need to make sure the market plays a decisive role,“ said Li in a nationally televised speech to China’s ceremonial legislature. He promised to „break mental shackles and vested interests“ — a reference to possible resistance from state companies that might lose subsidies and monopolies.

Entrepreneurs and investors are watching the annual meeting of the National People’s Congress for details of how the party will carry out its November pledge. Beijing has issued a flurry of minor changes such as simplifying processes for registering new businesses but has yet to take action on major tasks such as overhauling the state-run banking system.

Despite pledges of reform, the ruling party made clear the limits to possible change in its November plan by declaring that state ownership will remain the core of the economy.

The changes come as the ruling party tries to steer China to cleaner, more energy-efficient growth based on service industries and technology following the past decade’s blistering expansion.

Growth last year tumbled to a two-decade low of 7.7 percent, due largely to government curbs imposed to cool a lending and investment boom. It was barely half of 2007’s explosive 14.2 percent rate.

Li announced an official growth target of 7.5 percent for this year. That was unchanged from last year’s target and in line with growth forecasts by the International Monetary Fund and private sector analysts.

Li promised an array of changes in banking and finance that reform advocates say are essential to making the economy more efficient and productive.

Banks will be given more control over lending and interest rates, the premier said. That would allow profitable companies to compete for credit by paying higher rates, possibly channeling more money to entrepreneurs who generate most of China’s new jobs and wealth but are mostly unable to get loans from the state-run system. It also might boost rates paid on savings, putting more money in the pockets of Chinese families and encouraging consumer spending.

The premier also threw the government’s support behind the growth of popular new Internet-based banking services, promising to promote their „healthy development.“

Services such as one launched by e-commerce giant Alibaba Group have drawn billions of dollars in deposits from small savers by paying higher rates than state banks. Critics see them as a threat to the government-run financial system that supports politically favored companies. A commentator for state television last month called them „financial parasites.“

Li promised to open state-controlled industries such as banking, oil, power generation, railways and telecommunications to private investment. He pledged to „level the playing field“ for Chinese and foreign companies to promote competition.

The premier gave no details about key issues such as whether private investors would gain any management control in state-run industries. That is in line with China’s time-tested reform strategy under which the government experiments with reforms in a single city or province and studies the results before crafting detailed rules for rolling out changes nationwide.

Beijing will make domestic demand „the main engine driving growth,“ Li said. He promised to promote consumer spending by raising incomes and encourage growth of service industries such as education, tourism and care for the elderly, the premier said.

„We will enhance people’s ability to consume,“ said Li.

In a separate report, the Cabinet planning agency, the National Development and Reform Commission, promised to experiment with a change sought by business groups to simplify investment — a „negative list“ of fields that are off-limits, leaving all others open. That would overturn a system under which investors must wait for each industry or line of business to be declared open to private competition, which companies say fails to keep pace with changes in technology and markets.

The premier also promised to make progress in the ruling party’s marathon campaign to reduce excess production capacity in industries including steel, cement and solar panel manufacturing.

That glut has led to price-cutting wars and bankruptcies. But efforts to scrap excess capacity face resistance from politically influential companies and local leaders who want the jobs and tax revenue brought by new factories.


Globalization hurts children.

Out Of School: Globalization’s Children Are Being Abandoned

The Huffington Post  

Posted: 01/30/2014  

By Gordon Brown

BildThe seeds are being sown for waves of social unrest more threatening to authority than the Arab Spring and more widespread than the Occupy movement.

If world leaders thought that they could relax as the demonstrations of 2011, 2012 and 2013 petered out, today’s launch of the Education For All Global Monitoring Report compiled by Pauline Rose reveals the shocking disparities in opportunities for young people that are already fuelling the next generation of discontent.

The inequalities faced by ‚globalization’s children‘ — children born just before and after the millennium — make for grim reading.

It is heartbreaking that in 2014 — a year before we were to achieve the Millennium Development Goal of universal education — 57 million boys and girls across the world won’t even get a first day at primary school, and 500 million of today’s school age girls will be forever denied the chance to complete their schooling.

But it is also bad economic news for developing countries that even in 2030, one billion men and women out of a 3.5 billion global labor force will be without the most basic employment skills.

Indeed, despite the world’s promise that by 2015 every child would complete a basic education, today half the world is still being deprived and cheated of its dreams.

Today just 36 percent of children in the poorest countries complete their lower secondary education. By 2030 it will have risen — but only to 54 percent. And 23 percent, one child in every four, will not even have completed primary schooling.

It will take until 2069 for universal primary education to reach all poor boys in sub-Saharan Africa and 2086 for it to be offered to all poor girls.

And on present trends, it will take almost a century for universal lower secondary education to be achieved by all poor girls in sub-Saharan Africa.

The gender divide is not the only problem. Only one in four poor rural girls complete primary education today and even in 2030 half will still miss out. Ninety percent fail to complete secondary education today — and still 70 percent will be missing out in 2030.

The chance of getting a school place is so unequally distributed between rich and poor that in at least 11 African countries it could take until 2120 or later before girls from poor families enjoy the same rights just to lower secondary education as wealthier boys.

Being at school does not mean you have a decent education. We invest just $400 on a typical African child’s education from infancy to 16 compared with the $100,000 spent on the education of a typical western child.

The gap between the promise of globalization — opportunity for all — and the reality young people experience is already creating a restless and rebellious youth tension.

A report by the Initiative for Policy Dialogue and Friedrich-Ebert-Stiftung studied recent protests and found that: „The main reason why people around the world are protesting is because of a lack of economic justice. Overall, 488 such episodes are found in the period 2006-2013, 58% of total protests were counted in the study. They reflect people’s outrage… The majority of global protests for economic justice and against austerity manifest people’s indignation at the gross inequalities between ordinary communities and rich individuals and corporations.“

In future years, these young people will be increasingly aware through mobile devices and the Internet that they are poor and uneducated not because of what talents they have but because of where they live and who they are born to. Tension will increase because young people in the developing world will no longer be prepared to accept a world where your birth determines your fate, your rights are what others ascribe to you and opportunities are what your father or grandfather determine you can have.

It is in support of their rights to a fair chance in life that young people, business, faith groups, parents and teachers will come together over the next two years to demand a massive expansion of educational opportunities. By reinstating the political will to expand education for all by 2015 and by closing the inequality gap, we can change course for the next generation. And we should start by making sure that the 57 million children who are denied schooling are released from child labor, child marriage and discrimination and be provided with teachers and classrooms so that they can begin to learn.

Gordon Brown is the former prime minister of Great Britain, is the UN Special Envoy for Global Education.



Transatlantic Trade and Investment Partnership (TTIP) and the Global Trading System

Will TTIP Harm The Global Trading System?


Yale University

Jan 9, 2014

By Katinka Barysch, Michael Heise

BildThe United States and the European Union are about to start the third round of negotiations for a Transatlantic Trade and Investment Partnership, or TTIP. Such an agreement has the potential to forge a transatlantic marketplace for 800 million of the world’s richest consumers. This would make it easier for business to sell and invest across the Atlantic. But many fear that the agreement does not bode well for World Trade Organization that has sought to provide a framework for multilateral trade for almost 70 years and often helped poorer nations to get the same treatment as the rich.

Some European politicians wanted to put TTIP talks on hold until disagreements over NSA surveillance of Europeans have been cleared. But for now it looks unlikely that data security issues will derail the TTIP talks. Both the EU and the US governments are pushing for an early deal, and businesses on both sides are mostly in favor. But not everyone likes the idea of TTIP. Europe’s and America’s other trading partners – including China, Turkey and Mexico – are seriously worried that improved transatlantic ties could come at their expense.

Many people claim that TTIP is not really about economic gains but about geopolitics. Faced with the rise of emerging markets, the old West is pulling together one more time. Critics claim this is a vain attempt to defend the West’s economic leadership. China is particularly worried that it’s the target of TTIP, not least because the United States is simultaneously negotiating the Trans-Pacific Partnership agreement with some of China’s neighbors, including Japan.

True, TTIP has a political component. Many free trade agreements do – most notably the European Union itself, which integrated the markets of former adversaries in order to make them friends. But that does not mean that TTIP lacks an economic rationale.

First, TTIP is the result of the WTO’s troubles, not the cause of it. The latest round of multilateral trade talks, the Doha round, dragged on for 12 years, before member countries agreed on at least some of the issues under discussion in December 2013. But the Bali agreement fell short of original ambitions, and the WTO is still playing catch-up. Today, international trade is at least as much about rules and regulations as it is about tariffs. The WTO has not significantly updated its rulebook since 1994. But business has moved on. The idea from the US and the EU to work together to overcome global gridlock is legitimate.

Second, in many areas, regulations and processes on both sides of the Atlantic have been drifting apart for years, and even more so since the start of the financial crisis in 2007. The two sides owe it to their business communities and consumers to try and narrow the regulatory gap. Bilateral talks are probably better suited for this than involving the other 130 WTO members.

If TTIP turned out to be a broad and deep agreement, the US and the EU could look forward to significant economic gains. These are less likely to come from the one-off removal of remaining tariffs and protectionist red-tape, but from the permanent increase in competition, which in turn could fuel innovation and productivity, leading to better-paid jobs. More growth in the world’s two biggest economic areas would also mean more business for the other countries that trade with them. How much more is almost impossible to say. Since TTIP would be more about regulatory changes than tariffs, traditional calculations of how much new trade might be created and how much might be diverted from third countries cannot be applied easily.

Nevertheless, the regulatory nature of TTIP does pose particular challenges to the trading partners of the US and the EU.

First, if the US and the EU agree on new transatlantic standards, say, for cars, beef or medicine, all their other trading partners would have to comply with these – but without having had a say in their making.

Second, in many areas the EU and the US will not harmonize their rules but simply accept each other’s standards and processes as safe – a procedure called mutual recognition. Producers in Europe would then have to comply with only the EU standards, and they could also sell in the US, and vice versa. Third countries, however, might still have to meet two sets of standards, one for the EU and one for the US market. The extra effort could put them at a competitive disadvantage vis-à-vis American and European companies.

Third, TTIP is explicitly aimed at setting 21st century rules for issues that matter for global commerce today, but are not being dealt with anywhere. Some of these rules would affect emerging markets more than the US and the EU, for example how to treat state-owned enterprises, labor laws and energy subsidies in international trade.

The EU and the US should take such concerns seriously. There are ways in which they can make the TTIP talks less worrisome for their trading partners. For example, countries with which the US and the EU already have deep integration – including Mexico, Norway or Turkey – could at least be consulted in the rulemaking exercise. In areas where Brussels and Washington agree on mutual recognition, they could offer their trading partners to comply with either the European or the American standards, presumably whichever is lower, and then allow them to sell into the entire transatlantic marketplace. This would be a clear improvement over the current state of affairs. Finally, 21st century rules would only gain global traction if they enjoy a modicum of support and legitimacy among emerging markets.

The EU and the US can also try to make TTIP as WTO-compatible as possible. For example, the two could keep TTIP open for other countries to join later – and again, the most immediate candidates are countries with which the US and the EU already have functioning free trade deals such as Canada or Switzerland. The EU and the US could use the WTO’s well-established dispute settlement mechanism in their bilateral dealings as much as possible.

In parallel to TTIP, the US and the EU should support an ambitious reform of the WTO itself. Such reforms could include extending the WTO’s mandate to deal with 21st century issues and abolishing the overly rigid rule that all 159 WTO members need to agree on each and every trade deal. The partial Bali deal has shown that, in practice, this rule already plays a diminished role.

What the US and the EU should not do is pass up the opportunity to free up trade between the world’s two largest trade partners because the WTO is slow-moving and out of date. A well-functioning global trade body should be everyone’s first choice. But the WTO’s problems run deep; they have to do with new technology that is changing the nature of international commerce and with the rise of new economic powers. The WTO is by no means the only multilateral body that is in trouble: Consider the United Nations Security Council, the G20 or global climate talks. But TTIP could be a giant wakeup call for a trade organization that has been drifting towards irrelevance.

Katinka Barysch is director of political relations and Michael Heise is chief economist at Allianz SE.  

Rights:Copyright © 2014 The Whitney and Betty MacMillan Center for International and Area Studies at Yale